Substantial changes to the superannuation rules took effect from 1 July 2017 and one of them is the introduction of a $1.6 million transfer balance cap. Effective since 1 July 2017, a $1.6 million superannuation transfer balance cap has been imposed on the lifetime amount of superannuation that an individual can transfer into retirement phase. The question that must be asked is there any rule of thumb when adopting a strategy to commute the pension amounts that are over $1.6m for rolling back into accumulation.

The method DBA Lawyers special counsel Bryce Figot suggested involves a comparison between the amount an SMSF member has to draw down and the level of investment return generated by the supporting assets. Though this may sound relatively simple there are a few other key elements to consider such as the taxable and tax free components of the pension when there are more than one pension interest in the fund, who are the dependent beneficiaries etc.

Make sure you have everything covered off correctly – the following articles cover some general rules, guidelines and strategies to look at when deciding which pension to commute first.

In this edition, we look at some of the new measures to take effect from 1 July 2018, including the Single Touch Payroll system and new reporting requirements for superannuation funds. A common theme of both is the emphasis on “real time” reporting to the ATO.

Banning borrowings in superfunds seems to be a popular political topic at the moment. The argument seems to revolve around the idea that borrowing to buy property in a superfund is risky. But does this make any sense in the context of which borrowings are made?

Let’s look at the two most common uses of LRBA’s

Purchase of Business Property

The first thing to note is that superfunds traditionally have been able to hold business property and that there is currently no debate on removing this as an investment class for superfunds.

Normally though when it comes to buying business premises they are most commonly acquired by either individuals, companies or trusts. As the cost of acquiring property is generally high it is also typical that most of these purchases would be funded by borrowing. This type of purchase is not out of the ordinary and isn’t something that is labelled as being risky.

However, if a superfund acquires a business property using an LRBA can it be considered more risky? The asset itself is no more risky and if superfunds by nature are more risky why do we use them for retirement at all?

In fact you could argue holding a property in super is less risky as banks generally require greater equity contributions for the purchase of property in a superfund – this should reduce the risk. Also if you need to increase your contributions to super to cover loan instalments this can be done through pre-tax contributions whereas outside super any additional repayments have to be made from after tax income. Again this should only reduce the risk.

Purchase of Investment Property

Superfunds traditionally have also been able to purchase investment property. Again there has been no argument to remove this as an investment class for superfunds.

Individuals (or other entities) can also purchase an investment property. Again people have traditionally borrowed to buy an investment property and this is something which is commonly referred to as negative gearing. As mentioned before this type of purchase is common and has never been under attack as being risky.

However, if a superfund acquires an investment property using an LRBA can it be considered more risky? Basically it’s the same outcome – it’s just a different entity holding the property.

As per the business property example above banks generally require greater equity contributions for the purchase of property in a superfund – this presumably reduces the risk. Also if you need to increase your contributions to super to cover loan instalments this can be done through pre-tax contributions whereas outside super any additional repayments have to be made from after tax income. Again in my view this only reduces the risk.

Risk

So what is risky anyway – who decides and is it the same for everyone? Sure the government can ban superfunds being able to borrow. However, people being people will want to invest for the future and will borrow in other entities. Will the government therefore successfully reduce the risk by this strategy? Won’t this policy, if adopted, result in people simply investing in less tax efficient structures to hold and manage their retirement assets leading to less wealth to retire on? Could this policy therefore create a new tax burden for future generations to deal with as social welfare dependence increases ? And finally if people can’t borrow to buy property in their superfund as they don’t have enough funds to acquire a property outright – what will they do? What will they invest in? The share market? Well isn’t that supposed to be more risky !!

As part of the package of reforms commencing from 1 July 2017, superannuation funds, (including self-managed superannuation funds), will have new reporting requirements to allow changes in members transfer balance caps to be tracked in real time. A member’s transfer balance is the total amount of superannuation benefits in retirement phase, (i.e. paying a pension). The ATO has confirmed that only events which affect an individual member’s transfer balance need to be reported. Common examples include:

Income streams, (i.e. pensions), that a member was receiving on 30 June 2017 which continue to be paid to them on or after 1 July 2017 and that are in the retirement phase, (this does not include transition to retirement income streams)

New retirement phase income streams commencing on or after 1 July 2017; and

Commutations of retirement phase income streams on or after 1 July 2017.

The time at which an SMSF is required to report will depend on the value of the member’s total individual superannuation balances. Total superannuation balance refers to the total amount of funds in superannuation for an individual which may be across more than one fund and partly in retirement phase and partly accumulation.

SMSF’s with all members total balances less than $1 million are not required to report during the year, and can instead report events which impact their members’ transfer balances at the same time that the SMSF is required to lodge its SMSF annual return, (usually 15 May of the year following the end of the financial year). They can report the event at the time it occurs if preferred.

On the other hand, funds with at least one member with a total superannuation balance above $1 million will be required to report events affecting members’ transfer balances within 28 days after the end of the quarter in which the event occurs. This could mean an SMSF with all member balances below $1m, is still required to report after the end of the quarter if at least one member has additional superannuation funds elsewhere totalling more than $1m.

The time at which a member’s total superannuation balance is valued is either 30 June of the financial year preceding the year the member first commences a retirement phase income stream, otherwise 30 June 2017 if a member was already in receipt of a pension at that date, or commences a pension in the 2017 -2018 financial year.

If a fund was paying a pension to a member as at 30 June 2017, and this continues to be paid into the 2018 financial year, (and is a retirement phase pension – not a transition to retirement pension), these must all be reported to the ATO by 1 July 2018, regardless of member total superannuation balance.

We will be providing further updates shortly to our superannuation fund clients, however in the meantime if you have any queries, please don’t hesitate to contact us.